The term “financial strip-mining” is evocative, powerful; and the concepts behind it important, and clearly outlined in a recent interview with Les Leopold in The Sun Magazine. In case you haven’t heard of him before, Les Leopold is the author of Runaway Inequality: An Activist’s Guide to Economic Justice (looks like I have a new book to move to the top of my “need to read this” list).
In the interview, Leopold outlines the history — how this all began 40 years ago — with very little understanding, at the time, of how it would play out in the long run. It’s perfectly clear now that we’re living in a failed experiment. As he notes, such financially conservative publications as Forbes are even beginning to sound the alarm.
But, let’s step back a moment, and lay out Leopold’s two primary pillars of financial strip-mining:
- Buying companies with borrowed money then putting the debt on the corporations (leveraged buyout): The debt becomes a cash stream for banks and bond holders, and a financial burden for the corporation (but not a personal debt burden on the individuals/entity that bought the company). That debt load also reduces the taxes paid by the corporation (because corporate debt interest payments are tax deductible), and the tax revenues available to states.
- Stock buyback: Taking corporate profits and using them to buyback stock in the corporation, thus increasing the value of the stock.
His explanation of why stock buyback is so rampant today is clear and chilling.
For many hedge funds and private-equity companies, the name of the game is to buy a lot of shares in a company and then convince that company to cut expenses and use the money it saves to purchase its own stocks. This raises the price of the stock and therefore the value of the hedge fund’s investment in the company. These stock buybacks benefit CEOs, too. In 1980 about 95 percent of CEOs’ compensation was in the form of salary and bonuses, with just 5 percent in stock incentives. Now it’s the other way around, with roughly 95 percent in stock incentives and 5 percent in salary and bonuses. So CEOs have a personal interest in boosting the value of their company’s stock. They get the money to do the buybacks by cutting benefits, shifting production abroad, slashing research and development, selling off product lines, and so on.
If you have the time, the full interview in The Sun is worth your time. But if not, please at least let his term “financial strip-mining” enter your vocabulary. The term is powerfully evocative, and appropriate, to what has been happening in our country.
He lays out the broader impact on our view of ourselves, our culture. And that’s probably the part that hit me hardest, because it means we not only let financial raiders strip away the country’s wealth, we’ve also lost our vision, our belief in ourselves, our neighbors, our country.
Forty years of runaway inequality has changed what Americans think is acceptable and fair. In the 1960s we were moving toward free higher education. Now we think it’s normal for college students to go deeply into debt. We once believed that public service is a high calling. Now we look down upon public service; our definition of success is entirely monetary. We once thought that the government should help eradicate poverty. Now we say poverty is the fault of the poor, who must fend for themselves.
The last part — our giving up on the idea that poverty is something we should all fight to eradicate, and shifting the burden and blame onto those suffering most — that’s the part that stings the worst.